Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
One of the debates that is happening in cities all around the world right now is about whether or not it makes sense to redistribute public space in order to help with current social distancing measures. We are all being told to stay at home as much as possible, but as we venture out for food and/or sanity walks, many have started noticing that a lot of our sidewalks are in fact too small if you’re trying to stay 2m away from other humans. So with vehicular traffic way down, the question becomes: Should we start borrowing some of that space for pedestrians?
Here in Toronto the official position is no. Closing down streets and lanes to car traffic is usually referred to as creating an “open street.” And the intent of these open streets is typically to bring people together for public life, which, of course, is the exact opposite of what we’re trying to do right now. What this implies, however, is that there’s a belief that additional space for pedestrians would induce demand, similar to what is believed to happen when you add additional lanes on a highway.
Lewis Mumford probably had it best when he allegedly said, “Adding highway lanes to deal with traffic congestion is like loosening your belt to cure obesity.” So on the one hand, if you believe that more lanes doesn’t solve traffic congestion, you might also be inclined to believe that more and bigger sidewalks isn’t going to dampen the anxiety we currently feel when other humans get anywhere near us. The additional space would simply get filled with more bodies.
But maybe you could argue that this is a little bit of a different situation. We’re in a global pandemic for God’s sake and most of us have the better sense to stay home unless it’s absolutely necessary. Perhaps in this case, demand would not increase and the greater supply would simply better serve the demand that is already there. Perhaps. I don’t have a strong stance on this, but I’m fairly certain that technology could help with this decision.
Italian architect Gio Ponti is one of the most important architects and designers of the 20 century. An early adopter of modernism, he is credited with helping to renew Italian design after the Second World War through his design work, his writing, and his teaching.
As many of us dream of one day traveling again (I am currently devising an elaborate list of adventures), I thought I would share one of his projects — the Parco de Principi Hotel in Sorrento, Italy.
When it was completed in 1962, it represented a new kind of architecture for the town. Sorrento was ancient. The Parco de Principi was not. Ornament had been removed and its rooms consisted of largely two colors: white and blue.
In some ways this feels like a dreadfully obvious approach. Let’s celebrate and frame views of the Bay of Naples, and introduce the color blue while doing that. But the results are clearly anything but dreadful.
Ponti was more than just an architect, he was more broadly a designer. His furniture and industrial designs are also widely celebrated. And this attention to detail at multiple scales can make all the difference in the world.
For more photos of Parco dei Principi, click here.
The work of John Snow is instrumental to the field of epidemiology. In the mid-19th century, during what was the third major outbreak of cholera, he created the following map showing the clusters of cholera cases in London’s Soho neighborhood. Stacked rectangles were used to indicate the number of cholera cases in a particular location. This was a major breakthrough for the fight against cholera because, at the time, it wasn’t clear what was causing it. According to Wikipedia, there were two main competing theories. There was the miasma theory, which posited that cholera was caused by bad particles in the air. And there was the germ theory, which posited that cholera could be passed along through food and/or water.
By mapping the clusters of cases, Snow discovered a concentration of incidents in around the intersection of Broad Street and Cambridge Street (now Lexington Street) where a water pump was located that drew water from the Thames. This led Snow to the conclusion that it was maybe a bad idea to offer up polluted river water as drinking water. And sure enough, when the pump was shut off and residents were directed to other nearby pumps, the incidences of cholera began to decline. The germ theory had proven to be true.
The first time I saw John Snow’s map was in architecture school. Perhaps many of you have seen it as well. It is often used to illustrate the potential of visual representations to not only tell a story, but to teach the creator what that story actually is. In hindsight, it may seem obvious that polluted river water is something that we maybe shouldn’t drink, but it wasn’t at the time. This map helped people understand that. Today, we have far more sophisticated tools available to us, but we still have a lot to learn and we’re doing that every day — particularly during a pandemic.
One other thing worth mentioning is that there are a few exceptions to Snow’s findings. Supposedly, many of the workers in a nearby brewery were able to completely avoid the cholera infection during the outbreak by only drinking their own brew. Some say it is because the brewery had its own water source, whereas others say it is because the brewing process — the water is boiled — kills the cholera bacteria. Either way, I think the moral of this story is pretty clear: when in doubt, choose beer over water.
When you go to architecture school, you are indoctrinated to appreciate certain projects, buildings, and houses. One of those pieces of architecture, at least for my generation, is the Farnsworth House in Plano, Illinois, by Mies van der Rohe.
Completed in 1951 for Dr. Edith Farnsworth (a nephrologist), the house is one of the most celebrated midcentury modern houses in the United States. Today, the former weekend retreat is a museum owned by the National Trust for Historic Preservation. (Information on how to visit can be found, here.)
But what they don’t teach you in architecture school is that the house never really worked all that well as, you know, an actual house. And that the client and architect ended up embroiled in legal battles toward the end of construction.
This is part of the story that is told in Alex Beam’s new book, Broken Glass, which was recently reviewed by Witold Rybczynski in the Wall Street Journal. Now, Witold isn’t a fan of modern architecture to begin with and so the Farnsworth House never stood a chance:
Despite the purposeful appearance of his architecture, Mies was not particularly interested in practical matters. The travertine on the terrace weathered badly, and a poorly designed heating system left sooty stains on the windows. The glass walls resulted in spectacular heating bills in the winter and hothouse temperatures in the summer—there were only two small openable windows. Then there was the problem of condensation on the glass in cold weather. “You feel as though you are in a car in the rain with a windshield wiper that doesn’t work,” Farnsworth complained. A film about the genesis of her house, starring Elizabeth Debicki and Ralph Fiennes, is currently in the works. It will be interesting to see if it will show the doctor squeegeeing her foggy windows.
On his blog, Witold calls Mies an aesthete. Appearance was everything. My personal view is that it’s generally good practice to design houses so that they function properly. But icons are icons and the Farnsworth House is certainly an icon. Maybe we should just call it a prototype.
Phaidon — publisher of books on art, design, architecture, food, and fashion — has a new publication coming out this summer called, Studio Gang: Architecture. They are describing it as: “An in-depth exploration of one of the most important, innovative, and creative architecture practices working today.” As most of you know, we are working with Studio Gang on an important project in midtown Toronto. And so we are of course thrilled to see the firm’s work being celebrated. To pre-order a copy of the book, click here. They are supposed to start shipping around mid-May.
Very few of us have a mental model for the macro conditions that we are living through right now. We have been through economic downturns, but most of us haven’t lived through a pandemic. I am an optimist and I know that we will get through this and normalcy will return. But one of the questions that we’re all asking ourselves right now is: What will “normalcy” look like on the backend?
Here is an interesting piece of evidence for the current shutdown:
The shutdown is essentially complete. * Mar 8, avg bookings of 32 cities -3%. * Mar 18, -98%
All -100% except: Honolulu -75% Tampa -84% Scottsdale -90% Orlando -90% Atlanta -96% Phoenix -99%
Last update, back when the restart begins and we can track the return to "normal." pic.twitter.com/HzwE1jImL5
When I see pictures of our cities, like these from Italy, I can’t help but think of the life that normally plays out in the streets. The conversations. The chance encounters. And even the smells. Some of that activity has moved to every single balcony in Italy and that is a beautiful thing. But it’s no substitute for true street life. Thankfully, we know that public life will both return and prevail.
Along the way there will be changes. There are going to be winners and losers. Some companies are going to go bankrupt. And there will be adjustments that we have made that will invariably stick. Are we all going to video conference more? (The obvious one.) Will we all travel less? Will this macro event accelerate our transition to a knowledge-based digital economy? I’m sure it will. Also consider all of the new companies that are being started right at this very moment.
But as I said on Twitter today, we are social beings. That is one of the reasons why we choose to live in cities. And I am certain that isn’t going away.
This house was designed by the Spanish firm, Space Popular. It was completed last year in Santa Barbara, Spain. Two things, in particular, make it unique: (1) Its exposed steel structure (12×12 grid) and (2) its brick vaults. But both of these things really serve one idea. They express the building’s structure. And that’s about all you need for good architecture — one clear idea. All photography by Mariela Apollonio.
Harvard economist Edward Glaeser has a new paper out talking about “urbanization and its discontents.” In it, he argues that while cities today are working remarkably well for highly skilled people, they don’t seem to be delivering the same upward mobility to lower skilled people. The “urban wage premium” for this segment of the population has seemingly disappeared.
The posited causes of this discontent will likely resonate with many of you:
Urban resurgence represents private sector success, and the public sector typically only catches up to urban change with a considerable lag. Moreover, as urban machines have been replaced by governments that are more accountable to empowered residents, urban governments do more to protect insiders and less to enable growth. The power of insiders can be seen in the regulatory limits on new construction and new businesses, the slow pace of school reform and the unwillingness to embrace congestion pricing.
Unfortunately, this paper isn’t available for free online. If you’re interested, you’ll need to purchase a copy, here.
Yesterday I made a comment on Twitter about most people not understanding to what extent government bureaucracy inhibits the delivery of new housing in this city. It received a number of responses, including remarks about how development charges have also recently doubled and how this statement applies to pretty much every city out there. But there was also a comment about developers not being transparent and not properly explaining the impact to the public. In other words: please demystify the development pro forma. I thought that was a fair remark, and so this post is going to be a response to that comment.
Before I begin, it’s important to keep in mind that most developers have investors. These investors put up most of the money required for a project and in turn they take most of the profits. However, there is typically a “promote” in place, which is just an incentive structure that pays the developer more of the profits (disproportionate to the cash they invested in the project) if they perform and hit certain return benchmarks. All of this is to say that developers aren’t usually the ones holding all of the cash (which is what a lot of the public seems to think) and they are accountable to their investors to do what they said they would do.
Now let’s run through the costs that make up a “typical” development pro forma. For this example, I am going to assume that we’re talking about a 100,000 square foot mid-rise building; the kind that you might build and find along any one of Toronto’s Avenues. If we were doing this in real life, we would get more precise with the areas and consider gross construction area, gross floor area (city definition), and the net saleable/rentable areas. But to keep the math simple, we will ignore these differences. That’s the approach I’m going to take overall in the post. What you need to know, though, is that you have to pay to build the entire building, but you only get to collect revenue on a portion of it. That’s why the “efficiency” of a building matters.
Land
The value of development land is a function of what you can build and the revenue you can ultimately collect. So location matters a great deal. Based on the latest high-density land report from Bullpen and Batory, the average price of an unzoned mid-rise site in the City of Toronto is about $231 psf. So let’s assume a land cost for our project of $23.1 million. Assuming we can get land financing at 60% of the value of the land (loan-to-value), that would mean we’re putting up $9.24 million of cash (plus a loan guarantee!) and borrowing $13.86 million to start our project. At 5.25% per annum (interest-only loan), our annual interest charges would be about $727,650. From now on forward, we’re going to pay ~$60k in additional interest charges for every month that our project is delayed. Buckle up.
You should now begin to see why time is so valuable and why government bureaucracy can be so frustrating. As a developer, you’re heavily incentivized to move things forward, whereas it can often feel like everyone around you is trying to deliberately erect roadblocks in order to slow you down and make your project more expensive to build. Oftentimes, it is because it is less risky for them to punt things down the road and not make a decision. That is not the case for us and our project.
Hard Costs
Onto construction (or hard) costs. As many of you know, these have risen dramatically over the last 4 to 5 years. On some of our projects, we have added over $100 psf in hard costs alone. Part of this has to do with a busy construction market and part of this has to do with new building requirements: watertight undergrounds, new Green Standards, and so on. For our project, which is on the small side, let’s assume $360 psf for a total of $36 million. This would include our direct construction costs and our construction manager’s overhead (general conditions). We should also prepare for some of the trades to decline to bid on our project because it is too small and not worth their time.
Soft Costs
Soft costs include everything from consultant costs and interest charges to government levies and management fees. Like everything in your pro forma, these absolutely need to be broken out line by line. Don’t be lazy here. But for the purposes of this simplistic example, we’re going to use 75% of hard costs, which works out to be $27 million (or $270 psf). When I first started out in the development business, the rule of thumb was closer to 25% of hard costs. But times have changed. Government fees, alone, can make up about 1/4 of the price of a new condo in Toronto.
Adding up all of these costs, we’re at $861 psf or $86.1 million in costs. It’s now time to consider the revenue side. $1,000 psf seems like a nice round number, so let’s start there and assume we’re going to sell our condos for that. Typically in Toronto, the price you pay is inclusive of HST, so that liability will need to be deducted from our revenue line. It’s not a straight 13% because of the new home rebate, but the rebate also hasn’t been properly indexed since it was introduced and so the liability could still be upwards of 10%. (This is worthy of a separate blog post.) The result is $900 psf in revenue and a margin on costs that is less than 5%. No sensible developer would want to do this project. One misstep (or development charge increase) and you’re dead.
So let’s increase our condo prices to $1,100 psf. Maybe that will work. In doing that, we get to a margin on costs that is nearly 15%. Okay, now we’re in the range. But let’s say we just got delayed by 6 months (boom, interest charges) and our hard costs turned out to be off by $15. They’re actually working out to be $375 psf because of some new tariff and because the formworkers in the city are all tied up on bigger projects and couldn’t give a shit about our cute little infill project. Now we’re offside again in terms of our margin on costs. No problem, let’s try and push condo prices a bit more. Is $1,150 achievable? Perhaps. But ideally, given the above, we would want to be at $1,200 psf just to be safe.
This is an overly simplistic example of the math that goes into a development pro forma. But hopefully it begins to show you (1) just how many moving parts there are in a development project and (2) the kind of pricing that is required in today’s cost environment. Developers are reacting to the costs that they are being thrown and it is creating upward pressure on home prices. (See related post: Cost-plus pricing.) So far there has been enough elasticity in the market to absorb these price increases, but that may not always be the case. If you have questions about this post or disagree with any of my assumptions, feel free to leave a searing comment below.
I am working from home today, like many of you, I’m sure. The patio door is open and the news is on in the background talking about some sort of nasty bug that’s going around. It’s not half bad, except I prefer working in an office and being around other humans.
But never mind that, this recent article from the WSJ has me wondering where I can buy a 2,700 square foot loft for €1 and end up with the following renovation for under US$450,000 (photo by Rene de Wit):
A former school in Rotterdam, the city sold off the building as 7 residences. The loft you see here was the gym. Major foundation work was required (costing about US$565,000), but that got split up across all of the buyers/residences and factors into the number I threw around above.
At 2,700 sf, it’s not your typical urban residence. But it is interesting to see how they designed the space to be suitable for a family. There’s a separate children’s “suite” hidden behind the millwork next to the dining area. Look closely and you’ll be able to see the door.
For floor plans and more photos, including some before shots, click here. It’s worth seeing more of this place. Two storeys in the city is such a luxury.
